The oil & gas industry faces long-term price pressures from new competitors and future project portfolios need to be scalable and flexible, avoiding the high risks, costs, and poor productivity of the past. Lessons in efficient manufacturing will need to be learned. Industry expert, Harry Benham, formerly Shell, explains how to put energy projects back on track and discusses the 5 key actions to catalyze reduction in project size and complexity and increase performance.
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3. CARBURY CONSULTING
AGENDA
• The legacy of the last 15 years of high energy prices has been a slump
in project productivity and major increase in all project costs
• Increasing energy competition will maintain pricing pressure - project
performance will need to deal with lower levels of capex
• Radical transformation is required in project management for oil and gas
delivery to become more efficient and productive for the next era
• Leadership required in portfolio screening, revamp of the engineering
model, plainer contracts and aggressive uptake of professional planning
and management tools
4. CARBURY CONSULTING
FIVE KEY ACTIONS FOR PRODUCTIVITY
STRATEGIC
SHIFT
FROM SCARCITY
TO
COMPETITION
… portfolio shift
from volume to
efficiency, from
large single asset,
to scalable,
flexible units
CHANGE
ENGINEERING
MODEL
… limit in-house
design resource –
rely more on
market expertise
and standard
designs
SIMPLIFIED
CONTRACTS
AND
PROCUREMENT
… avoid
managing
complexity with
complex contracts.
Simpler templates
and scopes,
clearer obligations
INVEST IN
PROFESSIONAL
SYSTEMS AND
PLANNING
TOOLS
… avoid ad hoc,
in-house,
improvised or
generic processes
AVOID
CONSTRUCTION
COMPLEXITY VIA
DESIGN
… increase
modular,
dedicated yards,
standards designs
and layout
5. CARBURY CONSULTING
STRATEGIC
SHIFT
FROM SCARCITY
TO
COMPETITION
… portfolio shift
from volume to
efficiency, from
large single asset,
to scalable,
flexible units
CHANGE
ENGINEERING
MODEL
… limit in-house
design resource –
rely more on
market expertise
and standard
designs
SIMPLIFIED
CONTRACTS
AND
PROCUREMENT
… avoid
managing
complexity with
complex contracts.
Simpler templates
and scopes,
clearer obligations
INVEST IN
PROFESSIONAL
SYSTEMS AND
PLANNING
TOOLS
… avoid ad hoc,
in-house,
improvised or
generic processes
AVOID
CONSTRUCTION
COMPLEXITY VIA
DESIGN
… increase
modular,
dedicated yards,
standards designs
and layout
FIVE KEY ACTIONS FOR PRODUCTIVITY
7. CARBURY CONSULTING
EXTRACTION VS MANUFACTURING
Contrast IOC Production with US LTO
Top 8 IOCs US
Shale
Investment
2004-14
(Trillon USD)
1.5 0.35
Production
Increase –
mbpd
-1.5 4.5
8. CARBURY CONSULTING
ENERGY MEGAPROJECTS
Least Productive Industry in the past 15 years?
• Productivity down x5
• Return on Capital down x3
• Negative free cash-flow
• Production flat / RRR
negative
• Break-even at $65-80/bbl
• $500bn Marginal Project
Cancellations
• Plus Potentially $250bn of
further capex based on
performance
9. CARBURY CONSULTING
BIG IS FRAGILE
Complex is very different to Complicated
“Megaprojects are more
ubiquitous and bigger
than ever. Contrary to the
conventional proposition
of bigger is better, we
found big capital
investments to have a
propensity to fragility.”
“Fragility arises when
big is forced into doing
what was best left to
scalable.”
“..the theories of big on efficiency
and building capacity ahead of
demand encourages managers to
take “definitive static bets” on big
ventures.
What theories of big fail to
incorporate in their logic is that
oversizing a system increases its
complexity disproportionately,.
And this leads to fragility.
Despite their Goliath appearance,
big capital investments break
easily – deliver negative net present
value – when faced with
disturbances. A greater propensity to
fragility is intrinsic to big
investments.”
*www.arxiv.org: arXiv:1603.01416
Big is Fragile, An Attempt at Theorizing Scale, Ansar, Flyvbjerg et al
Prof Bent
Flyvbjerg
Major
Programme
Management
Oxford
University Said
Business School
Iron Law of Megaprojects
“Over time, over budget, over and over
again”.
• Over 90% failure rate
• Average over-run 50%
• Average schedule delay over 2 years
• Fat tails - 20% of projects over-run by 100-
200 %
• Failure rate remains constant over decades
in all infrastructure and energy industries
• Inherent / systemic risk
10. CARBURY CONSULTING
NEGATIVE LEARNING CURVES
Complexity Overcomes Economies of Size
Negative Learning Curves
LNG Plants ($/mt)
2004: $500–700
2014: $1,500–3,000
Mega-projects are highly complex one-offs, and
demand very experienced teams to manage
their unique difficulties. These intrinsic
characteristics prevent conventional
manufacturing mechanisms of cost
improvements such as standardization at a
distance and trial-and-error advances that lead
to rapid sustainable technical learning and cost
reductions.
https://www.bloomberg.com/gadfly/articles/2016-08-
29/big-oil-loses-love-for-big-projects
11. CARBURY CONSULTING
PRODUCTIVITY & ENERGY COMPETITION
Technology, Costs and Policy will determine the 2040 landscape
Source – IEA WEO 2015, Nov 2015
Oil – focused on transport
sector
Gas – “residual” between
coal and promoted
renewables
Even though some of the policies
identified in many scenarios have
not been deployed, they have in
fact been better predictors
of demand and consumption
Carbon Tracker, July 2016
12. CARBURY CONSULTING
OIL DEMAND – RUNNING OUT OF ROAD?
70% Oil demand from Transportation
Technology & Policy Feedback Loops
• Macro GDP reduction – population
urbanising and aging
• Driving patterns- VMT (cf USA)
• SE Asia Urban transport planning
policies – HSE / Congestion/ Network
scale
• Energy efficiency – l/100km / ratio of
new / second-hand / jet fuel
• Emission / clean-air policy
• COP 21
• Autonomous Vehicles
• EV penetration
• Plastics recycling
mbpd
Source: BP, McKinsey, Carbury Consulting
80
85
90
95
100
105
110
115
2015 2025 2035
BP - Exponential Trend
McKinsey Productivity
- 15
mbpd
0.5%
CAGR
0.9%
CAGR
-0.2%
CAGR
13. CARBURY CONSULTING
OIL DEMAND
The Basic Equation
Transport
Demand
2016
50mbpd
Gasoline
Diesel
Jet Fuel
GDP
Population
Car Ownership
Car Use
Transport
Demand
202X
< 50 mbpd
The Trend In Between ?
Financial – IIGCC / Green Bonds
Social – Carbon Tracker / Car Ownership
Regulatory – Emissions Standards / COP21
Technology – EV / Grid / Autonomous
Networks – Policy Forums / Social Media
Financial
Social
Regulatory
Technology
Oil
Demand
NETWORKS
*http://www.dollarsperbbl.com/2016/10/05/plan-b-the-unwalled-garden/
14. CARBURY CONSULTING
THE END OF EXPLORATION?
IEA Future Supply-Demand Scenarios
mbpd
Oil demand IEA 450 scenario
15. CARBURY CONSULTING
LESS CAPEX
Future Investment Scenarios
• Previous capex
trajectory 2000-14 at
15% pa growth
• IEA high growth
scenarios to 2040
imply capex growth
of 1% pa
16. CARBURY CONSULTING
Strategy / Group NOC IOC IND
Previous Growth
Model
Develop / Grow
Owned Assets via
Self-Managed or
IOC Service
Projects
Develop / Grow New
Infrastructure via
Megaprojects
Leverage new shale
technology / invest
with cheap debt
Current Model Continue
investments
Investment freeze,
review portfolios
Investment freeze,
review break-even
costs
Future Strategy Extend investments
/ leverage service
sectors / IOCs
Constrain
investment / reduce
cost base / NOC
Service model
Assess break-even
options to reinvest
Primary Finance
Focus
(Capex / Dividends /
Debt)
Capex Dividends Debt
Data / Information
Focus
Production Cashflow /
Economics
Productivity /
Efficiency
Supplier opportunities:
• Software
investment open to
all companies cf
construction
• Data organisation
vs collaboration
• Integrated
Engineering Design
• Plant efficiency
• Equipment logistics
• Yard layouts
FUTURE INVESTMENT STRATEGIES
CAPEX also competes with Debt and Dividends
17. CARBURY CONSULTING
LARGE ENERGY PROJECTS
Complexity Overcomes Economies of Size
• Strategic focus has been for volume growth, requiring huge investments and complex designs in
frontier locations
• This complexity, rather than input prices, has driven high costs, and very poor financial
performance
• Large one-off investments inhibit learning, and productivity which has not improved
• Attempts to standardise and innovate – limited impact due to size and complexity
• High risk strategy for owners and contractors even at very high oil prices
• Unlikely the oil and gas sector can sustainably “rebalance” to allow such scale and surge in capex
growth to happen again given performance history
• Needs major change in the way to manage future projects – from full reliance on giant infra-
structure build to greater project and operational efficiency
18. CARBURY CONSULTING
MEGAPROJECT COST OVERVIEW
The $80-120/bbl Legacy Model
>>Clare Colhoun
CONTEXT - IPA Best Practice Model*
• Aligned Stakeholders
• Robust Business Case
• Integrated Owner Team
• Front-end design
• Experienced Suppliers
• Appropriate Contracting Strategies
- Most projects have key gaps
* E Merrow, Industrial Megaprojects, 2011
One-off, major scopes with
many design changes
hamper learning and lead
to huge over-runs
Design customisation
drives price increases,
complex requirements
Limited owner teams
stretched across multiple
locations and complex
projects with ad hoc
systems – growth in cost
and re-engineering
15%
5%
20%
50%
10%
Construction
& Fabrication
Costs inc Over-
runs
Owner’s Team
Engineering
Services
Procured
Equipment
Other Costs
Third party specialist
engineering input –
increasingly managed by
Owner Teams
19. CARBURY CONSULTING
IMMEDIATE TACTICS AND IMPACT
• Capex – sharp contraction: future
growth of large projects impacted
severely
• Contractors and Staff – major
reductions: skills gaps ahead
• Costs with suppliers – renegotiate
prices, 10-30% reductions quoted.
Analysts suggest this may be maximum
available - need structural change.
CURRENT ACTIONS
Not Addressing the Key Issues
MEDIUM-TERM SOLUTIONS – VIABLE?
• Standardisation – proved difficult for
over 30 years, due to one-off nature
of most large projects: needs to be
designed in more deeply
• Innovation – can often be marginal
show-cased technical improvements:
need project-wide impact
• Collaboration – huge complexity and
limited time to achieve – design and
organisation maybe more effective
20. CARBURY CONSULTING
PORTFOLIO SHIFT
A Framework for Cost and Efficiency
Change megaproject philosophy from
mega-engineering to efficiency: challenge
“scale” benefits – the true risk-adjusted
value of bigger projects is often low.
Pursue smaller, more flexible, scalable,
faster, simpler alternatives: recycle high-
risk capital costs into alternate scalable
higher-NPV solutions.
Genuinely challenge the Design
Selection: avoid alighting on single
concept (and variations) quickly, including
assumptions on non-technical issues
such as JVs and locations.
Pursue smaller, more flexible, scalable,
faster, simpler alternatives: recycle high-
risk capital costs into alternate scalable
higher-NPV solutions.
Introduce more extreme stress tests: 20%
of megaprojects are runaways. (>100%
over-runs). Runaway scenarios for all
projects needed.
Adding padding is no solution: adding
50% contingency solves little – use
screening to force redesigns, not inflated
estimates
Avoid razor thin margins: investment
cases erode over time quickly – all
uncertainties add to the right, and sunny
assumptions need to be removed.
Systemic reductions need a step back.
Pursue standardization at the design
level, not by initiatives: don’t be seduced
by limited examples of standardisation.
Simpler less complex designs are
required to solve this deeper problem.
Don’t put all the effort into second order
cost issues: supplier price savings will not
deliver major cost improvements. Focus
on costs and demand with suppliers, and
less contract complexity.
Focus on early macro governance, not
later micro-governance: focus on
screening and choice – micro-governance
in the execute stage to fix over-runs only
adds more cost and complexity
PORTFOLIO PHILOSOPHY - BIG IS FRAGILE
SCREENING REALISM:
USE THE OUTSIDE VIEW
SYSTEM CHANGES - BY DESIGN
21. CARBURY CONSULTING
STRATEGIC
SHIFT
FROM SCARCITY
TO
COMPETITION
… portfolio shift
from volume to
efficiency, from
large single asset,
to scalable,
flexible units
CHANGE
ENGINEERING
MODEL
… limit in-house
design resource –
rely more on
market expertise
and standard
designs
SIMPLIFIED
CONTRACTS
AND
PROCUREMENT
… avoid
managing
complexity with
complex contracts.
Simpler templates
and scopes,
clearer obligations
INVEST IN
PROFESSIONAL
SYSTEMS AND
PLANNING
TOOLS
… avoid ad hoc,
in-house,
improvised or
generic processes
AVOID
CONSTRUCTION
COMPLEXITY VIA
DESIGN
… increase
modular,
dedicated yards,
standards designs
and layout
FIVE KEY ACTIONS FOR PRODUCTIVITY
22. CARBURY CONSULTING
Project Management: Complicated vs Complex
Information Is Restless
Data Source TB / Day Type Challenge /
Focus
Jet / Wind Turbine 1-2 Homogenous Interpretation
Smart Bridge 1 Homogenous Interpretation
Smart Ship 0.02 Homogenous Development
Offshore Platform 1-2 Multiple
Homogenous
Organisation
Offshore Platform -
Database
0.1 Multiple
Homogenous
Acceleration
/Interpretation
Patient – Central
Hospital
0.02 Hybrid Organisation /
Interpretation
Major Construction
Project
0.02 Heterogenous / Organisation /
Collaboration /
Interpretation
Digital /
Complicate
d
Analog /
Complex
23. CARBURY CONSULTING
ENGINEERING, CONTRACTING & SYSTEMS
Legacy of Large Projects
In-house engineering teams change
industry codes / standards
Constant flux and re-design (including JV
partners)
Constant increase and revision to scopes
of work during construction
OWNER ENGINEERING STANDARDS
COMPOUND LARGE PROJECT
COMPLEXITY
• 2,000 Pages each for FEED and EPC -
with inexperienced owner teams
• 10 – 20,000 engineering drawings, plus
50% re-work
• 25,000 elements of correspondence
• Management of change critical but size
overcomes it
• Move to smaller scale / standards
removes symptoms of complexity
LARGE PLANTS CREATE LARGE EPC
CONTRACTS CREATE MORE
COMPLEXITY
• Blends of spreadsheet / paper / pdf /
supplier and owner
• Corporate standards weak or highly
generic – imposed on suppliers
• Preferred amalgams of service suppliers /
software – bespoke outcomes
• Obligations of layers of terms and
conditions managed tactically
• Limits / negates knowledge transfer
AD-HOC, IMPROVISED CONTRACT
MANAGEMENT SYSTEMS DON’T HELP
24. CARBURY CONSULTING
SIMPLIFY ENGINEERING, CONTRACTING & SYSTEMS
Organisation and Tools
Reduce in-house engineering and design
– rely more on market expertise
Assurance / support of contractors on
simpler / scaled designs
“Careful review” and QA / QC
EPCs to step up
Don’t wait for cross-industry collaboration
/ small-bore initiatives
NOC development support
* Ed Merrow, Offshore, 13 Jan 2016
ENGINEERING MODEL CHANGE*
Move to smaller scale / standard
contracts - removes symptoms of
complexity
Repeat work with key suppliers
Risk and obligations clear – avoid
transference
Common standards (IP, MHH, GN)
Simple remuneration schemes – no
incentives, fair margins
CONTRACTING STANDARDS AND
TEMPLATES
Formalise systems for planning and
correspondence
Improve contract controls and information
and change management
Digitise the analogue systems used today
– more technological project focus for
efficiency
Drive multi-disciplinary approach –
individual disciplines use systems, but
Project Management remains more ad
hoc
PROFESSIONAL CONTRACT
MANAGEMENT SYSTEMS – DIGITAL VS
ANALOGUE
25. CARBURY CONSULTING
STRATEGIC
SHIFT
FROM SCARCITY
TO
COMPETITION
… portfolio shift
from volume to
efficiency, from
large single asset,
to scalable,
flexible units
CHANGE
ENGINEERING
MODEL
… limit in-house
design resource –
rely more on
market expertise
and standard
designs
SIMPLIFIED
CONTRACTS
AND
PROCUREMENT
… avoid
managing
complexity with
complex contracts.
Simpler templates
and scopes,
clearer obligations
INVEST IN
PROFESSIONAL
SYSTEMS AND
PLANNING
TOOLS
… avoid ad hoc,
in-house,
improvised or
generic processes
AVOID
CONSTRUCTION
COMPLEXITY VIA
DESIGN
… increase
modular,
dedicated yards,
standards designs
and layout
FIVE KEY ACTIONS FOR PRODUCTIVITY
26. CARBURY CONSULTING
REVISED PROJECT DELIVERY MODEL
Scalable, Flexible, Organised, Supplier Standards
Engineering
Procurement
Construction 1 Over-run
Construction 2
Proc
LC
Constr 1
Constr 2
Constr 3
Year 1 Year 8
Stage-Gate
Linear
One-off
Large-scale
High complexity
Scalable
Portfolio
Similar construction
experience
Standardisation at a
distance
Complicated not
complex
• Screening
• Efficiency vs
Size
• Organised Data
75kbpd
8 yrs
3x
20kbpd
4 yrs
Year 4
Engineering
In-house
27. CARBURY CONSULTING
SUMMARY
AND CONCLUSIONS…
ENERGY LANDSCAPE QUICKLY SHIFTING – GREATER
COMPETITION FROM SCALABLE TECHNOLOGICAL
ENERGY
DEMAND FOR CORE ENERGY PRODUCTS (OIL & GAS)
UNCERTAIN – POTENTIALLY EX-GROWTH
PROJECT PORTFOLIOS NEED STRUCTURAL SHIFT
• Move from heavy reliance on large, complex
infrastructure - no learning curves
• Owners to take lead in refocusing in-house
engineering and contracts – simplicity /
efficiency
• Greater use of digital and data – replication of
design, materials, lay-out, and contract
management
• Focus on value – leverage assets - design
scalable, adaptable options or buy them
1. STRATEGIC REVIEW OF PORTFOLIO –
ROBUST SCREENING TO SMALLER,
SCALABLE FROM LARGER, COMPLEX
2. REFOCUS ENGINEERING – REDUCE IN-
HOUSE AND RELY ON MARKET
EXPERTISE
3. SIMPLIFY CONTRACTING – TERMS,
CONDITIONS, OBLIGATIONS, SCOPE
4. INVEST HEAVILY IN DIGITAL PROJECT
PLANNING AND SYSTEMS – AVOID AD
HOC AND IMPROVISED
5. CONSTRUCTION SIMPLICITY –
MODULAR, SCALABLE, LAY-OUT
5 KEY ACTIONS
– TO CATALYSE
REDUCTION IN
PROJECT SIZE
AND
COMPLEXITY
AND INCREASE
PERFROMANCE
28. CARBURY CONSULTING
PANEL & QUESTIONS
Project Excellence is more than Just Engineering Efficiency
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